Slowing Revenue Growth Offset by High Occupancy and ADR

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In 2016, the strong growth levels enjoyed by the U.S. lodging industry for the past few years experienced a significant slowdown. Moderate rate growth and flat occupancies were the norm for most hotels. Similarly, total revenues and overall profitability showed only modest increases in 2016. Despite the slowing of revenue growth, the U.S. hotel industry remains at peak levels of occupancy, ADR, and overall profitability.

2016 Labor and Growth Revenue
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In examining approximately 5,000 hotels that participated in the HOST P&L program in both 2015 and 2016, we found that 42 percent of the hotels actually had a decrease in profits for 2016. This was a significant increase from 2015, when only 26 percent of hotels experienced a decline in profit. The median occupancy for these hotels was 75 percent, with a median ADR of $124. Full-service hotels achieved house profit gains of 2.9 percent in 2016, while limited-service hotel profits were relatively flat, increasing only 0.8 percent. Management fees and property taxes exhibited some of the strongest growth in 2016, both increasing over 5 percent, while utilities actually decreased for the second straight year, dropping 3.6 percent.

In 2016, U.S. hotel industry revenue reached an estimated $199 billion, while industry-wide house profit topped $76 billion. These total revenues and house profit represent all-time highs. Inflation-adjusted revenues also surpassed the previous all-time peak back in 2000. Real profits were the second-highest during the last 27 years, and the overall profit margin is just below the peak achieved in 2000.

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US Lodging Industry Revenues and Profit
Copyright 2017 STR, Inc. All Rights Reserved

In comparing profitability in 2016 to 2000, the primary difference comes from labor costs. Based on HOST participants for both years, labor costs represented 28.5 percent of total revenues in 2000 versus 33 percent in 2016.

Labor costs in the lodging industry are starting to grow considerably in several markets. In 2016, labor costs in Seattle increased 8.2 percent compared to 2015, while labor costs in Phoenix, Los Angeles, and Honolulu also experienced increases of over 7 percent. Many factors have increased labor costs in these markets, including new minimum wage and overtime laws, as well as a scarcity of skilled workers. Overall, labor costs for the U.S. increased 4 percent in 2016, which is slightly down from the 4.2 percent growth in 2015.

In the coming years, labor costs will continue to increase for hotels throughout the country as many of the new minimum wage and overtime laws have yet to take full effect. In the past several years, revenue growth has been strong enough to mitigate expense increases. However, as the industry enters a phase of marginal-to-flat revenue growth, controlling costs will become as important as ever.

 

About the Author
Joseph Rael is STR’s director of financial performance.